Sample Issue Index
Prepared by The Wall Street Digest, Inc.
The sales and profits of American corporations have been improving relentlessly, quarter after quarter. The use of computers, software, robots, just in time inventory management systems, and steadily improved management will continue to increase the value of American corporations. Dow 7600 in 1997 and Dow 10,000 by the year 2000 are not unreasonable targets for the U.S. stock market. Every day on CNBC, I hear market technicians forecasting a severe market sell-off and occasionally a crash.
Most of these bearish forecasts are based on valuation, which is terribly myopic. The dividend yield (1.97%) is now at the lowest level in history. The market is selling at the highest book value (4.95) ever and mutual fund cash is below 6%. While all of these statements are true, I disagree that a market crash or sell-off is imminent.
I believe too many people are watching the level of the pool, when they should be watching the faucet.
Valuation levels are climbing relative to earnings, but the faucet of
money flowing into the pool is wide open, and stock prices will rise until
the Fed does something significant to slow the faucets of money. Let's
take a look at the seven faucets of money. The dividend yield is low because
many corporations have stopped paying or stopped increasing the dividend
payout.
If corporations did not have the cash or the profits to pay dividends,
then I would be concerned about the shrinking dividend yield. However,
I think the dividend yield will fall even lower and disappear from many
corporations.
The fact is the S&P 400 industrial corporations are sitting on a
record hoard of cash. They have enough cash to double the dividend yield
and still have enough cash remaining for normal operations. And that is
reason #1 to be bullish. The Sunday New York Times business section for
March 2nd listed the 15 nonfinancial companies with the most cash per share.
My staff researched the dividend yield for each of the companies listed
and it should have been impressive. After all, they have the most cash
per share of stock. However, it wasn't impressive. Ten of these 15 cash
rich companies paid no dividends. Of the top six richest companies, only
one paid a dividend (.7%). The richest company, King World Production,
pays no dividend. Here is the dividend yield for the remaining four companies,
and all of these dividend yields are lower than the market dividend yield
of 1.97%. Stride Rite 1.6%; Autodesk .7%; Boeing A/C 1.0%; Biomet .6%.
Reason #2 to be bullish, is what corporations are doing with all of that
cash. Corporations are using their cash for stock buyback programs which
lowers the P/E and pushes stock prices still higher. Corporations are also
using their cash for mergers and acquisitions, which again shrinks the
number of shares available for purchase.
Even with new shares available from Initial Public Offerings, there
was a net loss of shares available for purchase in both 1995 and 1996 because
of stock buy-back programs, and mergers and acquisitions which totaled
$660 billion in 1996.
A market selling at five times book value today is not the frightening
problem it would have been twenty years ago. First, it is a composite number,
and therefore meaningless. The U.S. was a manufacturing country in the
60's and 70's. Therefore, the amount of money invested in plant and equipment
to manufacture steel and automobiles was a very large number.
Today, however, the U.S. is a technology and information based service
economy.
Fully half of the gross domestic product is generated by the
service sector where people are the product, or people sit at computers
and create new products, new software, new computer games, etc.
Microsoft's market value is based on profits. But how to you assign
a book value to 500 spooky bright computer engineers who sit in isolated
rooms creating new software?
What is the book value of a computer consulting firm or a personnel
placement firm when the only capital asset may be a computer to schedule
the consultants or the people?
I would not be concerned about the book value composite in today's economy.
Reason #3 to be bullish is liquidity. While mutual fund cash is at a low
level, other cash levels are at record highs. Liquid assets in the U.S.
just reached a record $3.8 trillion. This is amazing, when you consider
that we are in the seventh year of a bull market without a 10% correction,
and the seventh year of an economic recovery without a recession. Amazing?
Yes, it has never happened before. There is $3 trillion invested in
mutual funds, but there is $3.8 trillion in cash sitting on the sidelines
waiting for a correction.
Reason #4 to be bullish is interest rates. The U.S. has the lowest interest
rates in 20 years. That is bullish for the economy. However, the U.S. has
the highest interest rates (except for Italy) among the G-7 countries,
and that is bullish for the stock market. Here's why: In Japan, the 90-day
T-bill is yielding .5%, compared to 5.1% in the U.S.
Smart Japanese investors are borrowing money in Tokyo at 1%. Then they
move the money to the U.S. to buy stocks and bonds. The same thing is happening
in Germany and other G-7 countries. The net result? $80 billion every quarter,
or $320 billion annually is flowing into the U.S. from foreign countries
because of higher U.S. interest rates and a stable dollar. Most of this
foreign money flows into our stock and bond markets.
That is a very large faucet of money not controlled by the Fed. If the
Fed raises interest rates to slow economic growth, this faucet will open
even wider, and the dollar will rise against the yen and the German Mark.
I know the Fed doesn't want that. Reason #5 to be bullish is our federal
government.
Over the last 7 years, the Federal Reserve has been printing an average
of $343 billion annually to finance deficit spending by Congress.
Deficit spending provides liquidity to the economy and the stock market,
which fosters faster economic growth but with unnecessarily high interest.
Balance the budget honestly, and the long bond yield will fall to 3%. What
would that do to stock prices? Marvelous things! And you'll love it, if
it ever happens.
Reason #6 to be bullish is our banking system. The banking system and
Mr. Greenspan both want you to spend and borrow.
Proof of this is in your mail box. How many of you are receiving pre-approved
credit card applications in the mail? Two billion of those credit card
applications were mailed last year by the banking system. Another 2 billion
will be mailed this year. Thanks to these credit cards, the banking system
is creating $200 billion dollars in new loans annually.
Reason #7 to be bullish are the nation's growing pension fund assets.
In 1980, pension fund assets were only $500 billion. After pension reform
in the mid-1980's, money invested in pension plans began to soar.
$2.7 trillion is invested in pension plans today. At current rates of
growth, $12 to $13 trillion will be invested in pension plans over the
next fourteen years. Now, the total value of all stocks at the end of 1996
was only $8.9 trillion. So, $12 to $13 trillion in pension fund cash is
an awesome amount of money chasing a shrinking supply of stocks. I believe
that alone will virtually guarantee higher stock prices.
There is an estimated $25 trillion dollars in cash worldwide searching
for a low-risk bull market to invest in, at the touch of a computer key.
Never, in the history of the world, has so much money been so freely
and cheaply available for investment, growth, and expansion. The bottom
line of what I have just described is that we have learned how to create
awesome sums of money. It is money that is the most important force that
drives stock prices higher. The world is floating in a sea of paper money
without inflation, and interest rates are still not rising. Stay fully
invested. Our portfolio allocation remains as follows:
80% U.S. stock market
30-year U.S. Treasury bonds 20%
And 30-year zero coupon bonds 100%
April, 1997
The Wall Street Digest, Inc.
You may also contact CONSENSUS at:
phone: 816-471-3862, fax 816-221-2045
Relocated 04-18-97
Last updated on 04-18-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com
